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The Rise, Stumble and Future of Lululemon

How will the activewear brand that helped create the market rise above a consumer backlash sparked by a defective product, an avalanche of new competitors and an estranged, yet influential founder? BoF speaks to chief executive Laurent Potdevin.
A yoga class at Lululemon's Vancouver headquarters | Source: Courtesy
By
  • Lauren Sherman

VANCOUVER, Canada — Antonia Iamartino is a Lululemon Athletica lifer. An employee since 2005, she is sitting on a cushy, fabric-covered ottoman in the Whitespace Workshop, the area of the company's campus-like Vancouver headquarters — internally called the Store Support Centre, or SSC — where product research, development and testing takes place. Next to her is a rack of workout leggings, which range in color and style from electric pink with a high waistband to scalloped-edge black pedal pushers.

But Iamartino, a designer on the Advanced Concepts team, is less interested in discussing the aesthetic flourishes of the pants than their feel. Last September, the company introduced a new leggings strategy. The initiative was both ambitious and risky. (Given that bottoms are a major component of the Lululemon business, the company didn't want to introduce change that would risk alienating loyal customers).

Lululemon "Naked" Engineered Sensation leggings | Source: Lululemon

Instead of categorising leggings by style or sport, each store’s “pants wall” is now broken down by sensation. “Engineered sensation,” Iamartino says with a sweet self-assurance. Today she is wearing “the Align style” leggings in black, with an oversized grey cable knit sweater and studded black booties. The Align leggings — designed to fit close to the body without feeling tight — are made of a velvety 81 percent Nylon, 19 percent Lycra mix and meant to offer a “naked” sensation. There are now five sensations on offer: Relaxed (away from the body), Naked (close to the body but not restrictive), Held-In (a bit tighter), Hugged (even tighter) and Tight (full compression).

The delineations were established over a year spent reviewing feedback from the company’s 1,500 ambassadors, testing material efficacy in the lab, and observing customer behaviour in store. (While not mandatory, the majority of corporate employees work retail shifts in the local outposts.) The SSC’s more than 1,000 employees — who work in a five-storey, 130,000-square-foot space with generous skylights where the elevator is rarely used — had their own opinions as well. “We’re all athletes and living the lifestyle,” Iamartino adds.

Indeed, one glance around the company's headquarters makes it clear that in order to work for Lululemon, one must believe in the brand’s ethos. Motivational quotes are emblazoned on bathroom stalls and hallway walls: things like, “Don’t focus on what’s missing, focus on what is” and “Life is like riding a bicycle, in order to keep your balance you must keep moving.” (The latter is attributed to Albert Einstein.) Along with an average five exercise classes a day at the company's on-campus studios, employees are offered two free sessions a week at studios around the Vancouver area, most of which are run by Lululemon ambassadors, who are wooed not by money, but the promise of a platform for reaching potential clients. They also test product and are consulted during every step of the development process. These are not sponsored athletes in the traditional sense. Instead, ambassadors serve as on-the-ground evangelists — yogis, triathletes, personal trainers — committed to the Lululemon cause.

It all has a lot to do with achieving personal goals and living your best life, the driving ethos behind a culture of self-improvement that, over the past 10 years, has grown into a multi-billion dollar industry. According to a recent Mintel survey, the majority of millennials prefer to spend money on activities and experiences than physical luxury goods. That means things like boutique gym classes, travel and food, many of which are seen as good-for-you experiences that can be enhanced by wearing a pair of great-fitting leggings. “For [millennials] to justify a purchase, luxury items or experiences must have a functional, performance-oriented reason for its higher cost,” wrote Lindsay Rowe, vice president of client engagement and strategy at creative agency PBJS, in a recent blog post.

“People value experiences more than they value stuff,” says Joseph Pine, co-author of The Experience Economy, along with James Gilmore. The two describe product innovation in consumer markets as a five staged “progression of economic value” from commodities to goods to services to experiences to personal transformations, such as yoga classes, where the participant-customer undergoes a positive change. “A transformation is built on an experience that helps you to change in some way, either physically or emotionally,” explains Pine. “But occasionally you have to buy something to enable those experiences and transformations. That’s where Lululemon fits in. There is an extra reason to buy from them. But they’ll also have to continue to refresh and innovate. They can’t just rest on their laurels.”

Joseph Pine and James Gilmore describe product innovation in consumer markets as a five staged “progression of economic value” from commodities to goods to services to experiences to transformations, such as yoga classes, where the customer undergoes a positive change. | Source: Pine & Gilmore

Take Off and Turbulence

Founded in 1998 by Dennis J. “Chip” Wilson, Lululemon was at the forefront of this shift. Wilson spent the first 20 years of his career in the surf, ski and skatewear industries. When he fell in love with yoga, he saw an opportunity to bring the more technical, performance-oriented focus of the product being created for these categories to the wimpy cotton pieces worn by hippie-dippy yogis. He used word-of-mouth to sell his gear, setting up shop inside yoga studios and enlisting instructors as ambassadors, a method the company still employs today. In 2005, Wilson sold 48 percent of the company to private equity firms Advent International and Highland Capital Partners. By 2007, the company went public. In its 2014 fiscal year, annual net sales reached $1.8 billion, up 13 percent year over year, although sales at brick-and-mortar stores open at least one year were down 1 percent. According to projections, the company will close fiscal 2015 ahead again. Between Cyber Monday and Christmas Day 2015 — a period in which most retailers, particularly in North America, were forced to rely on deep discounting and doorbuster deals in order to liquidate product — 90 percent of Lululemon goods purchased were sold at full retail price. Lululemon estimates that 2015 fourth-quarter revenues will reach between $690 million and $695 million, pushing full-year sales well over $2 billion.

It's a success story to be sure, but Lululemon has also faced significant stumbles, most notably its much publicised Sheer Pants Debacle. In March 2013, the company was forced to recall a $98 pair of leggings — 17 percent of its pants inventory — which customers complained were see-through. (Six months later, it re-released the style with an extra layer of fabric, calling it, with a wink and nod, the “Second Chance Pant.” It retailed for $92.)

At the time, Wilson was still very much the spiritual leader of the brand, despite the fact that he had stepped down from his role as chief executive in 2005. Exacerbating the on-going situation, the founder made a controversial statement on Bloomberg TV in November 2013: "Quite frankly, some women’s bodies just don’t work for it… Even our small sizes would fit an extra large. It’s really about the rubbing through the thighs, how much pressure is there.” The comments outraged customers and baited the business media, which often relies on volatility and drama to attract a broader readership. What was once a rapidly growing company ran into financial turbulence, with several consecutive quarters of negative comps, a measurement of productivity used to compare sales of retail stores that have been open for a year or more.

Weve got an incredibly loyal customer base. But when we got hit with the sheer pants debacle there was this atomic bomb dropped on the brand and we had no way of amplifying the grassroots. There was no microphone.

In May 2014, months after Wilson’s Bloomberg incident, he resigned as chairman of the Lululemon board. In September 2014, Wilson sold 50 percent of his 40.2 million shares in the company, earning approximately $845 million in the process. (Wilson still owns 20.1 million shares or approximately 13.85 percent of company.) In February 2015, the founder announced that he would vacate his seat on the board of directors entirely.

The move, while not unexpected, allowed the founder to focus his energies on Kit + Ace, a collection of performance-driven daywear and loungewear founded by his wife and son in August 2014. “Technical luxury,” the company calls it; or, in more common parlance, “athleisure,” the much-maligned, yet oft-repeated phrase created to describe technical clothes worn regularly outside the gym. While Lululemon officially abhors the idea of athleisure — its garments are engineered to perform, executives say — it is undeniably at the center of the trend, which has made it acceptable (even chic) to wear workout clothes pre- and post-exercise.

As a result, Wilson now finds himself competing against the company he founded nearly 20 years ago. Of course, Kit + Ace is just one of hundreds of activewear brands that have emerged in the past decade, many of which have raised significant sums of venture capital funding as the market grows. According to a 2015 report by Morgan Stanley, the activewear market is set to reach $83 billion in sales by 2020, a more than 30 percent jump from 2015. What’s more, there is already proof of concept. Along with Lululemon, breakout successes include Under Armour, which is projected to generate $3.91 billion in its 2015 fiscal year.

Other competitors with traction include London-based Sweaty Betty, which was founded around the same time as Lululemon but is only now expanding in North America with around $50 million in annual sales. Also of note are Athleta, Yogasmoga and Outdoor Voices (which has plenty of fashion credibility thanks to investor Jean Touitou, founder of APC), all targeting the middle of the market; Lucas Hugh and Monreal London, active at the top end of the market; and big-box retailers like H&M and Old Navy, which are battling for the discount shopper.

That’s enough pressure to severely challenge a company. And yet, Lululemon is not out of the game. How is the brand getting its groove back and does it have what it takes to keep up the momentum?

Worship the Ideas, Not the Man

Right now, the answer has a lot to do with chief executive Laurent Potdevin, who was appointed to the position in December 2013. He replaced Christine M. Day, an ex-Starbucks executive who oversaw Lululemon during a period of growth, as well as the disastrous sheer pants affair. (Day later said she left the brand not because of the sheer pants incident, but because of ongoing disagreements with Wilson.) Like many of Lululemon's newer employees, Potdevin says he first recoiled when approached by a recruiter about the role. "I was perfectly happy," he explains in his office, exactly two years after joining the company. "I remember saying, 'Don't tell me it's Lululemon.'"

The Swiss-born Potdevin's track record of toggling between fashion and performance brands must have piqued the interest of the Lululemon board. After earning an engineering degree, he went through Paris' ESSEC Business School, joining Louis Vuitton in the early 1990s. He was working in operations in Louis Vuitton's New York office, under current chief executive Michael Burke, when he was recruited in 1995 by Vermont-based snowboarding company Burton. "We went from this counter-cultural, teenage boy, dope-smoking kid on the chairlift to building [snowboarding] into an Olympic sport," he says. "Burton was the creator of this market and everything we did was very focused on standing sideways: surfing, skateboarding. Even when skiing had a bit of a resurgence, we never got involved."

Potdevin remained at Burton for 15 years, only to be persuaded to join the socially-minded shoe company Toms as president in 2011. “Before Toms, philanthropy, to me, was going to a black tie dinner and participating in a silent auction,” he says. “In a very short period of time, we became the largest gifting supply chain the world.” He spent much of his time there creating factories in the countries where Toms' partners were giving shoes to children as part of its social business model, including Nigeria, Haiti and Ethiopia. “It was interesting to see us creating jobs for the parents while doing something great for the kids,” he says. “We closed the loop. We were not about solving every problem in the world, but what we did, we did very well.”

While the executive was happily settled in Santa Monica, California, where Toms is based, he was drawn in by the challenges and opportunities presented by Lululemon. “I couldn’t stop thinking about it,” he says. “[Lululemon] is an amazing brand. It created a market and that market is growing globally. I knew, despite all the noise, it was pretty unique. But the voice of the brand and the voice of the founder were one in the same. The brand didn’t have [its own] voice.”

The days of brands telling you what to wear, how to wear it, are gone. The guests own the brand. Getting involved with communities is so much more powerful than traditional marketing.

Indeed, like many founder-led companies, Lululemon’s successes — and struggles — had as much to do with Wilson’s proselytism as with its product. Consider the slogans printed all over the store’s shopping bags, which are not unlike the phrases that decorate the company's headquarters: “Friends are more important than money.” “Write down two personal, two business and two health goals for the next one, five and 10 years. Goal setting triggers your subconscious computer.” “Listen listen listen. Then ask strategic questions.”

These kinds of motivational sayings remained when Potdevin joined. Maybe that’s because he already planned on doing what they suggested. “I’m a good listener,” he says. “Every day I would hear stories about our ambassadors, about things we have done in the community.”

What he found was that many of the practices Wilson had implemented, from the ambassador program to a decentralised business model, which gives store managers ownership over their merchandise, were right for the brand. They just needed to be better communicated. “I would ask, ‘How are we telling these stories?’ But we weren’t. Most companies would go to an agency to create content. We had all of this content and we were not distributing it,” he says. “It’s the curse and the blessing of grassroots marketing. In the communities, we are really strong. We’ve got authentic relationships, we’ve got an incredibly loyal customer base. But when we got hit with the sheer pants, or with Bloomberg, there would be this atomic bomb dropped on the brand, and we had no way of amplifying the grassroots. There was no microphone.”

Potdevin’s first order of business was loosening the company's return policy. This eased the relationship between the store’s employees, or “educators,” as they are called — who take great pride in the product, even those sheer pants — and customers (known as “guests”) whose trust of the brand had been eroded. “My first focus was to be guest-centric. To say yes to our guest,” he says. “They come back if something isn’t working and if something is not working, then we have to fix it. It was really giving permission to [employees] to be powerful and confident again. Letting people get back to what they’re good at.”

After four quarters of consecutive negative comparable-store sales, there was a positive turnaround in the fourth fiscal quarter of 2014. And while comps were down again in the first fiscal quarter of 2015, the second and third quarters of fiscal 2015 brought a 6 percent rise in revenue for stores open at least one year.

Potdevin is passionate about decentralised management. Store layouts are created with input from the store teams, and merchandising plans are not dictated by headquarters, nor is staffing or salaries. He mentions Brittney, a manager at the brand’s Santa Monica location. “Brittney is probably 27 or 28, she’s running a $12 or $15 million store and she owns that P&L,” he says. “We don’t have that cookie-cutter approach, so the people that we get don’t see themselves as working retail.” The way the company opens stores is also unique. The brand first rents temporary showrooms — essentially pop-up shops — so that its "educators" can get to the know the neighbourhood, figure out which zip codes are buying the most, and whether or not there are enough fitness-minded people in the area to create a community. If it’s working, the company expands into a permanent space.

Store managers also handle the relationships with community ambassadors, many of whom own fitness studios in the area. Increasingly, however, the ambassador program includes local leaders whose profession might have nothing to do with exercise. The ambassador program is forever expanding at the local and corporate level, with informal relationships between the brand and plenty of bold-faced names.

Like a holacracy, the controversial — some would say failed — organisational model most famously employed by Zappos, which has spurred an exodus from the online shoe retailer, Lululemon's teams are given the power to implement and iterate new initiatives. Potdevin has offered employees more autonomy in other ways as well. The company's staff was famously required, under Wilson's reign, to attend Landmark Forum, a series of controversial self-improvement seminars. Today, the choice is theirs. "I think that the intent of being focused on people's lives and their leadership and development is incredibly important and we're going to be more focused on that than we've ever been," says Potdevin, who attended the seminars when he first arrived at the company. "I think Landmark is one of the tools, but it's not the only tool. First of all Landmark, it's nothing unique. Their delivery is unique. It works for some people, and it really doesn't work for others." The next step, he says, is for Lululemon to build its own curriculum "that works for everybody."

At the corporate headquarters in Vancouver, there is a lot of talk of vision and goals, which all employees, no matter their position, work on throughout the year. Once again, it's the idea of self-actualisation that's driving the culture. "Athleisure might come and go, but the lifestyle of being athletic and mindful isn't going anywhere," he says.

Design-Led vs. Merchant-Led

A look born from New York's Lululemon lab | Source: Courtesy

But it's the changes Potdevin has made within design that will perhaps have the biggest impact on the company in both the short- and long-term. Along with the revamped pants program, which has seen early success, Potdevin has chosen to expand the brand's Lululemon Lab to New York City. Run by Angela Hartman, who started at Lululemon in 2004, the program is a design incubator within the company. The Vancouver Lab, which first opened in 2009, employs a three-person design team and nine sample makers, as well as five sales people. Everything is designed and produced in Vancouver. The pieces — many of which fall further under daywear than the core line's offerings — have a more urban, luxurious feel. (Think minimalist puffer coats and long, merino-wool dresses.) And while some of the best sellers find their way into the company's main collection, the Lab's offerings are limited edition and not sold online, just in the modest retail spaces connected to the Lab's design and sample room. The same will be true when the second Lab opens in New York City during the third week of March, which will employ two designers and nine sample makers. (Those designs, however, will be produced overseas.) The idea is to build something specific for the city in which the lab is based, says Hartman, a chic, Dries Van Noten-wearing type who recently moved back to Vancouver after living in New York and, before that, Los Angeles.

But the New York Lab is just one part of Potdevin’s goal to transform Lululemon from a merchandising-led company to a design-led company. His grander gesture was to promote Lee Holman — who joined the company in 2014 from Nike to run the women’s division — to the position of creative director, overseeing all design at the company. “How do we go from playing defense to offense?” Potdevin says. “From looking over your shoulder to see what worked yesterday, to inventing the future. Having the courage to bring new product to market.”

To Potdevin, that meant continuing to elevate function along with form. So the chief executive also promoted Dr. Tom Waller to the position of senior vice president of the brand's research and development arm, Whitespace. Waller and Holman work in tandem. "We're in a very unique position where we started with function and we built design off of that," he says. "We solve the problem for the athlete first, whether it's in yoga, run or crossfit, or surf and swim."

For Waller, who has spent his career consulting for performance brands, the close connection he has to Holman’s team makes all the difference. “At old school companies, there’s a wall between R&D and innovation and everyone else. R&D and innovation throw the good stuff up over the wall and listen for the cheers,” Waller says. “But if you can bring insight to people early enough, then they’re more likely to pull [your technology] into the business. Lululemon has the sort of company culture that allows us to exist that way.”

Indeed, there is a nimbleness to Lululemon that requires the same of its leaders. Much like Potdevin, Holman has hopscotched between performance and more traditional fashion companies, making him particularly well-positioned for the challenge. (Before Nike, where he oversaw all apparel and equipment, the British-born, Central Saint Martins graduate worked for Christopher Bailey at Burberry, and has also held positions at Abercrombie & Fitch, Levi's and Habitual, where he was a partner.)

Despite some hiccups, Lululemon’s product continues to enjoy a good reputation, particularly among serious athletes. But as other, newer brands have begun taking their design cues from fashion, the aesthetic of Lululemon has not evolved as quickly as the rest of the market.

One step into Holman's office makes it clear that change is afoot. The inspiration boards for Lululemon's Winter 2016 collections hint at lace detailing, lingerie-inspired straps, and hefty knits. While yoga and running remain top of mind, Holman and his team must think more than ever about studio classes like spinning and TRX, or those that combine multiple disciplines. "I love the notion of these hybrid workouts, and designing against those," he says, inspired by the challenge of working within the parameters of performance apparel. "I have two sons. If you give them 10 boxes of Legos, they're going to open all of them and not be very creative. If you give them one — possibly two, if you're nice — they'll be more creative. I really am a strong believer of being focus and edited. Let's not do everything at once."

Instead, Holman has chosen to focus his efforts on going deeper into fabric development and construction: original prints, embroideries and techniques. For instance, he commissioned a designer in Paris who has couture experience and works predominantly in feathers to collaborate with the company's yoga team. "How do we engineer it into the product rather than just veneer it?" he continues. "I really want to engineer around the body." A nice example of this is the scalloped edges on the collection's compression tights. The flourish is special, but it's also practical, ensuring the hems don't dig into the wearer's leg.

Beyond Yoga

Yoga and its principles remain at the core of Lululemon. A packed lunchtime session at the company's on-campus yoga studios — led by in-house guru Danielle Mika Nagel — is some evidence of its continued influence on the staff. (Potdevin hired Nagel, a former store ambassador and popular local instructor, after she led a meditation session during one board of directors meeting.) But Lululemon has long catered to runners and cross-training athletes as well.

To Potdevin, the major areas of growth are not necessarily around categories, but around demographics and geography. First, there’s men’s, which now accounts for 16 percent of the business, with comparable store sales of the category up 24 percent in the third quarter of 2015, and which the executive believes can be a “billion-dollar opportunity midterm.” While the company opened a standalone men’s store in New York’s Soho in November 2014, Potdevin says the focus will remain on making existing stores more friendly to males. “Early on, we didn’t give enough permission to the guys to walk into Lululemon,” he says. “The standalone store in Soho is a fun exercise, but I don’t think we’ve got enough scale in the men’s business to open more just yet.” There’s also Ivivva, the activewear line for tween girls, although it doesn't seem to be a top priority for the company.

The two biggest opportunities seem to be in international and digital. "Since day one, I've said that the rest of the world could be bigger than North America and I still feel that way," Potdevin says. "I do believe that to build a global brand, it's not about Vancouver. It's about having the right people that are incredibly knowledgeable of the market and are aligned with the culture, that's when we succeed." The company has opened hubs in London and Hong Kong. Ken Lee, a veteran of Fossil and Coach, runs the Asia operations, and has opened multiple stores over the past year: two in Hong Kong, two in Singapore, with a South Korean rollout set to kick off imminently. "It's all about the right people on the ground," Potdevin says. "You're never going to hear us say that we're opening 200 stores in China."

And while the company has lagged behind online, Potdevin has scurried to catch up, creating a sort of think tank within the company around the digital opportunity, and hiring Miguel Almeida from Walgreens (and, before that, Apple) to run its online operations. The division now makes up 19 percent of the overall business and is poised for a relaunch in 2016. “We’ve been able to drive highly qualified traffic with no reduction in conversion,” he says. “It speaks to the power of the brand.”

It’s no surprise that many of Potdevin’s top hires spent time at companies like Apple and, perhaps most importantly, Nike. (Along with Holman, Duke Stump, the executive vice president of brand and community, spent 15 years at Nike.) However, don’t expect a pair of Lululemon shoes in the near future. “[Shoes] would be a massive distraction,” he says. “A lot of people do that really well. I would never say never because we’d be passionate and good at it, but not right now.”

Instead, Potdevin will continue to focus on creating superior product in existing categories and inspiring the company's employees — alongside its brand ambassadors — to continue to spread the Lululemon gospel. Certainly the hope is to muffle media speculation that the company is poised for a takeover, potentially by Under Armour, Nike or VF Corp. Wilson, too, is a factor. Still a major shareholder, he continues to voice his opinion publicly. During a December 2015 Bloomberg TV appearance, the founder said he considered buying Under Armour in 2012. Today, Under Armour’s market capitalisation is about $15.3 billion; Lululemon’s is $8 billion, according to Bloomberg.

While Wall Street analysts have been mixed in their opinion of Lululemon, the company’s strong guidance for the fourth quarter of the 2015 fiscal year has left many hopeful for 2016. “We believe the stage is set for momentum to continue in 2016, particularly as supply chain initiatives kick in and reflect improved design processes,” MKM Partners analyst Roxanne Meyer wrote in a recent note to investors. “Additionally, we look for innovation to continue to drive sales; we look for bottoms to continue to outperform, while the tops category is expected to be re-energised in [the second half of the year]. Additional upside could stem from the website relaunch.”

While Potdevin wouldn’t — or couldn’t — comment on a potential takeover, he was happy to entertain the idea of Lululemon acquiring other brands in the space. "Why not? If it was a way to boost innovation, or to get into a new category, then yes, in the context of acquisition, we’re totally open, we’re continually looking,” he says. “We have no debt, we have a lot of cash, we have got a very profitable business model. We’re in very good shape to do what we do and not compromise any of our integrity,” he continues. “I feel really good about that.”

Disclosure: Lauren Sherman travelled to Vancouver as a guest of Lululemon.

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